Test Your Knowledge on Liability Policy Triggers in Insurance Contracts

Liability Policy Triggers in Insurance Contracts

• Liability insurance contracts have different policy triggers that determine how liability shall attach to the policy and how the policy responds to claims.

• There are three critical periods to the insurance of liability risks: the run-in period, the period of insurance, and the run-off period.

• The causation basis trigger requires that the events causing the loss must take place during the period of insurance.

• The occurrence basis trigger requires that the damage or harm suffered by the 3rd party must take place or occur in the period of insurance.

• The occurrence trigger provides coverage for a run-in period and for a run-off period.

• The manifestation basis trigger deems damage or injury to have occurred when the insured first becomes aware of such damage.

• The claims made basis trigger uses the making of a claim by the injured 3rd party against the insured as a proxy for causation or occurrence.

• The claims made trigger significantly reduces the tail of liability claims, but the run-in coverage provided under claims made can be substantial.

• Claims made policies also contain an extended reporting period.

• Liability insurance claims have a long tail, which induces problems in pricing the risk, allocating resources, and accounting.

• The occurrence trigger is vulnerable to all the above problems because it has no mechanism of reducing the length of the tail.

• Liability insurance policies require the insured to notify the insurer of any circumstance that may lead to a real claim in the future.Understanding Liability Insurance Policy Wordings: Occurrence, Claims Made, Manifestation, and Causation

• Liability insurance policies specify the way a policy responds to consequences of wrongdoing by the insured, with trigger words like occurrence, manifestation, causation, and claims made.

• Occurrence wordings provide continuous coverage even after the policy has been terminated, as the insurer remains on risk if a claim is filed subsequent to the termination of the policy and is traced to an occurrence happening during the period of insurance.

• Claims made contracts attempt to avoid perpetual coverage by making the liability of the insurer dependent on the making of the claim by the third party against the insured during the policy period.

• Liability insurance policies written on manifestation or causation basis are not common, and most professional indemnity insurance policies are written on claims made basis due to the nature of PI claims that do not fit the occurrence terminology.

• The occurrence wording has caused a lot of legal controversy, and claims made policies have a circumstance notification clause that requires the insured to notify the insurer of any circumstance that may give rise to a claim.

• Failure to give notice as soon as practicable is a condition precedent to the insured's right to recover under the policy, and the requirement to give notice is interpreted narrowly by courts.

• A circumstance that may give rise to a claim is one which created a reasonable and appreciable possibility (but not necessarily a probability or likelihood) that it would produce a loss, and notice of a circumstance has to be clear and unambiguous.

• The approach taken in the UK regarding the circumstance notification clause in claims made policies is different from that followed in Australia and New Zealand, where the scope of the circumstance notification requirement is narrow compared to the UK.

• It is not always easy to determine what a circumstance is for purposes of notification to the insurer, but all it requires is a reasonable expectation that the circumstance in question may result in a claim for which there may be legal liability under the policy.

• The purpose of the notification clause is to make the insurer aware of all circumstances surrounding the substantive claim, allowing the insurer to investigate the same at the earliest possible time.

• Liability insurance policies specify the way a policy responds to consequences of wrongdoing by the insured, with trigger words like occurrence, manifestation, causation, and claims made.

• Each of these words has different consequences and implications for the insured and the insurer, and each of these words has been adjudicated by courts in different jurisdictions.